A round-up of the latest developments

House of Commons briefing paper confirms certain corporate governance reforms likely to apply from January 2019, not June 2018

The government's response to its Green Paper published in August 2017 outlined various corporate governance reforms including the introduction of secondary legislation which would require quoted companies to:

  • report annually in their remuneration report on the ratio of CEO pay to the average pay of their UK workforce; and
  • provide a clearer explanation in remuneration policies of a range of potential outcomes from complex, share-based incentive schemes.

That legislation would also require public and private companies of a significant size to explain how their directors comply with the requirements of s.172,  Companies Act 2006 to have regard to employee and other interests and, to the extent not already required to do so, disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow any formal code of governance.

It was originally envisaged that draft secondary legislation would be consulted on in March 2018 with a view to it coming into force in June 2018. The government has now indicated that it is more likely that the reforms will apply to financial years beginning on or after 1 January 2019 which should coincide with implementation of the revised UK Corporate Governance Code. No publication date for the legislation has been indicated. The Financial Reporting Council (FRC) is due to publish the revised UK Corporate Governance Code later this summer.

Government launches review of the FRC

The independent review of the FRC has launched a call for evidence, seeking evidence from stakeholders on topics such as:

  • the FRC's role and purpose;
  • its effectiveness and its powers;
  • its potential role in preventing corporate failure;
  • its legal status and relationship with the government;
  • its governance and leadership;
  • its funding, resources and staffing; and
  • its role in reducing major corporate failure risk.

The review will also examine:

  • whether or not the FRC is, as was charged in the recent Select Committee report on Carillion, 'chronically passive', 'timid' and requiring culture change;
  • whether or not it is too slow, insufficiently proactive and whether its actions have sufficient deterrent effect; and
  • whether or not it is too close to, or unwilling sufficiently to challenge, the 'big 4' audit firms.

Responses are required on or before 6 August 2018.

Law Society guidance – whether intragroup guarantees can amount to a distribution

The ICAEW previously issued guidance to the effect that a distribution can arise from a subsidiary guaranteeing a liability of its parent or fellow subsidiary if the subsidiary does not receive a fee at market rates in consideration. The Law Society has now released its response stating that, in its opinion, a guarantee given in relation to a 'normal financing transaction' does not constitute a distribution, whether or not a fee is payable. A 'normal financing transaction' is expressed to be one in which, at the time the guarantee is given, the board of directors of the guarantor properly considers the financial position of the member of the group to whom the credit is provided and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay or refinance the credit when due and therefore that a claim is unlikely to be made on the guarantee. In doing so, the Law Society notes that, following case law, one must look at the substance of the transaction rather than the outward appearance such that there may be a distribution where: (i) the intention is that the guarantee will be called (or, viewed objectively, that is likely); and (ii) the subsidiary does not receive appropriate value for assuming that contingent liability. Whether entering into a guarantee constitutes a distribution must be tested at the time it is entered into. If it is not a distribution when entered into, it will not be a distribution should it later be called.

The Law Society has also published its view on the following: If an English company, which is a member of a group of companies, makes an on-demand loan to its parent company or to a fellow subsidiary, can that loan constitute a distribution of assets to its members? The Law Society's view is that a normal on-demand intra-group loan, whether interest bearing or not, is not a distribution - again where, at the time the loan is made, the board of directors of the guarantor properly considers the borrower's financial position and concludes, in good faith and on reasonable grounds, that it is likely to be able to repay the loan when repayment is demanded.

Key Contacts

Richard Preston

Richard Preston

Managing Associate, Corporate Finance
London, UK

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